– Written by
Frank Davies
STORY LINK Pound-to-Dollar Forecast: GBP/USD Crashes After Sharp UK Inflation Drop
Pound Sterling reversed earlier gains as UK inflation fell sharply, dragging the Pound to Dollar exchange rate (GBP/USD) back to 1.3326 despite continued doubts over the dollar outlook.
The data has effectively sealed a BoE rate cut this week, limiting Pound support.
Traders are now focused on whether the BoE validates expectations for further easing next year.
GBP/USD Forecasts: 8-Week Best Fades
The Pound to Dollar (GBP/USD) exchange rate jumped to 8-week highs in immediate reaction to the US jobs data before a retreat to around 1.3415 amid profit taking on short dollar positions.
After the round of jobs data, markets still expect that the Federal Reserve will cut interest rates at least twice in 2026 and dollar confidence remains weak.
Traders also expect that the Bank of England (BoE) will cut rates this week and a key element for the Pound will be the bank’s forward guidance.
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There is the potential for significant selling interest in the 1.3480-1.3500 area.
Rabobank has a 3-month GBP/USD forecast of 1.32 amid a dollar recovery early next year.
Scotiabank commented on the BoE; “While a 25bpt on Thursday is widely expected and fully priced, we have been concerned about the prospect of a neutral cut, leaving GBP bears (and those positioned for considerable BoE easing) vulnerable to adjustment.”
US non-farm payrolls increased 64,000 for November, slightly above consensus forecasts of around 50,000, but this followed a reported decline of 105,000 for October which was triggered by a slump of over 150,000 in government payrolls due to the shutdown.
The unemployment rate increased to a fresh 4-year high of 4.6% for November from 4.4% in September.
Average hourly earnings increased 0.1% on the month with the year-on-year increase slowing to 3.5% from 3.7%.
Markets are pricing in around a 30% chance of a further Fed rate cut in January.
MUFG commented; “The Fed may attach more weight to the December NFP report given it should be less impacted by the recent US government shutdown than today’s report.”
Domestically, the UK PMI business confidence data was slightly stronger than expected with the manufacturing index at a 15-month high, but overall confidence in the UK economy remains fragile.
Jefferies economist Modupe Adegbembo commented; “The improvement in the headline (PMI) measure is welcome, but it still points to sluggish UK growth at best.”
She added; “We continue to think the BoE will cut faster than markets currently price, with the Bank Rate declining to 3% by the end of 2026. The PMI data does not change that view.”
Berenberg economist Andrew Wishart is broadly downbeat on the UK outlook; “We revised down our forecasts for 2026 growth and inflation recently as our concerns shifted from persistent price pressures to the growing likelihood of a demand slump.”
He added; “Indications that job losses are mounting give us greater confidence in our view.”
Despite the PMI data, Berenberg is forecasting three BoE rate cuts next year.
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TAGS: Pound Dollar Forecasts
